condominium
owners
Timely ideas, insight, inspiration and information of particular interest to condominium owners
Matilda Lici Associate Aird & Berlis LLP Ava Naraghi Associate Shibley Righton LLP
Insolvent Developers
Trust in Me The Pitfalls of Paying Purchase Funds Directly to Developers Building a condominium development is a massive financial undertaking. Any sudden fluctuations in the developer’s liquidity may adversely impact any number of parties with a stake in the development project. In an attempt to improve liquidity and fund the ongoing construction, some developers resort to asking purchasers to pay some or all of the purchase funds to the developer directly. Ordinarily, such funds would be paid by the purchaser into a trust account set up for the benefit of secured creditors, such as first mortgagees.
Two recent Ontario decisions shed light on the priority disputes that arise when an insolvent developer is unable to satisfy its obligations to secured creditors and the serious consequences befalling those purchasers who elect to pay purchase funds directly to the developer. 1. Equity will favour bona fide purchasers The protections afforded to condominium purchasers will vary depending on how far the purchase has progressed at the
time when a priority dispute arises. Those who have paid for their unit in full are more likely to garner the court’s sympathies. In Centurion Mortgage Capital Corp. v. Brightstar Newcastle Corp., 2022 ONSC 1059, the Court was dealing with a priority dispute between a purchaser who had paid the entire purchase price for a condominium unit and the remaining mortgagee of the condominium development. The developer, Brightstar, had pressured the purchaser, Mr. Rasmussen, to prepay the final balance of his purchase price ($270,320) to Brightstar. Brightstar had told Mr. Rasmussen that it needed money to complete construction of the project, and the balance of his purchase price could not be used for
construction purposes unless it was paid to Brightstar directly, rather than into the trust account of the deposit trustee. While initially reluctant, Mr. Rasmussen ultimately acquiesced. Guarantee Company of North America (GCNA), the remaining secured creditor with an interest in the condominium project, claimed that its security had priority over any interests Mr. Rasmussen may have and he should not receive clear title to the unit. GCNA argued that Mr. Rasmussen had a valid claim for repayment of, what GCNA characterized as, his loan to Brightstar and he should (a) advance a further $270,320 into the deposit trust account in order to receive clear title and (b) CONDOVOICE FALL 2022
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ILLUSTRATION BY JASON SCHNEIDER
When developers divert sale funds to pay for their construction costs, they inevitably deplete the pool of sale proceeds available for when they later need to pay back the secured loans of mortgagees. Such deficits can impair a developer’s ability to close the sale of the condominium units and convey clear title to the purchasers of those units.